India’s stock market surge highlights long-term opportunities

A NEW all-time high for India’s stock market is the latest sign that global investors should not overlook the significant long-term investment opportunity the country offers.

This follows record-breaking rallies throughout December 2023 by the benchmark indices – the blue-chip NSE Nifty 50 and the S&P BSE Sensex. India’s stock market capitalisation had surpassed US$4 trillion earlier that month, but at the close of trading on Jan 22, 2024, the combined value of shares listed on Indian exchanges topped this, reaching US$4.33 trillion.

Fuelled by relentless positive sentiment, the increase propelled India to become the fourth-largest equity market globally for the first time, just ahead of Hong Kong’s US$4.29 trillion.

Solid foundations in place

The dynamics of the Indian market lend themselves to strong momentum in domestic equities.

Investor demand has been a key driver, including a rapidly growing domestic retail investor base. These investors typically use Systematic Investment Plans, which allocate a fixed amount to a mutual fund scheme at fixed intervals, which means investors are participating in the capital markets regularly (rather than taking a one-off, lump-sum approach). In addition, India has seen sustained inflows from foreign institutional investors.

The country has been a standout economically, too. Robust corporate earnings, local credit growth, and positive high-frequency indicators, along with sound monetary policy and broadbased recovery in sectors from financials to autos to fast-moving consumer goods, have provided macro stability and a compelling investment landscape.

As a result, the International Monetary Fund (IMF) recently adjusted its India gross domestic product (GDP) projection upward by 0.2 percentage point, to 6.3 per cent for both this year and next.

India’s financial sector has been an important pillar for stability and growth prospects. The asset quality of domestic banks, for example, has improved, with non-performing loans falling and credit to the private sector growing – both of which are contributing to robust balance sheets.

At the same time, core industries – including steel, cement, electricity, petrol, and diesel – are showing robust growth. Further, with strong foreign portfolio flows, the businesses can raise equity at high valuations, in turn creating a more reliable capital-raising environment.

Energy – and especially renewable sources – is another area of progress. While the country’s per capita energy consumption is only a third of the world’s and a fourth of that in China, India’s large industrial sector and growing consumer market will require a lot to fuel them.

Indeed, the latter is expected to be a key driver of growth both at home and overseas over the coming years. Barclays, for example, projects aggregate discretionary consumption in India to treble to US$2 trillion by 2030.

Indian equity an attractive alternative

India has been a significant global player in IT services outsourcing, adding to the country’s long-term investment appeal as a destination to diversify supply chain operations.

Beyond its consumer pulling power, the country offers a viable alternative for outsourcing compared with other emerging nations. In particular, as a scalable manufacturing location with relatively stable political leadership, India has been luring fresh capital from the US and European companies pursuing near-shoring and “friend-shoring” strategies.

For global investors, these trends reinforce India’s potential for greater scope for growth. Additionally, the MSCI Emerging Markets Index under-represents India, and there are still pockets of value within large caps, such as in financials, healthcare, and technology. Meanwhile, the surge in domestic retail activity bodes well for small and mid-cap stocks, enabling many of these businesses to raise low-cost equity capital.

India is a long-term story, and within such a dynamic economy, we believe capturing the most compelling opportunities requires robust fundamental, bottom-up research that looks beyond index weights. In this way, investors can find the most attractive companies – those with solid business models, strong management, and fair valuations, and that have the potential to deliver sustainable returns for investors over different market cycles – while remaining vigilant against the potential risks.

With a thoughtful approach, global investors may tap considerable long-term investment opportunities offered by Indian equity.

The writer is equity product specialist at PineBridge Investments